Short Sellers, Institutional Investors, and Corporate Cash Holdings

Abstract

This paper studies the effect of stock short selling on corporate cash holdings. Short selling can increase the cost of external financing and exacerbate financial constraints. Consistent with the precautionary motive, firms react to short-selling concerns by holding more cash. This paper documents that within an industry greater open short interests are associated with more cash holdings. This effect is stronger for firms more vulnerable to short selling, such as financially constrained firms and firms with more liquid stock, more short-term investors, and more product market competition. Share repurchases are not common for firms to fight against short sellers. Based on a quasi-natural experiment, endogeneity concerns are addressed using difference-in-differences analysis, which shows the effect concentrates in small firms.

Keywords: Short selling, Institutional investor, Cash holdings, Financial constraints, Share repurchase

JEL Classification: G14, G23, G32